Speaker 1: Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. Along
Speaker 1: with Jonathan Farrell and Lisa Brownwitz. Daily we bring you
Speaker 1: insight from the best and economics, finance, investment, and international relations.
Speaker 1: Find Bloomberg Surveillance on Apple Podcast, Suncloud, Bloomberg dot com,
Speaker 1: and of course on the Bloomberg Terminal. We are going
Speaker 1: to stop the show right now. John Farrell, Lisa Brammitts,
Speaker 1: and myself, We welcome all of you on radio and
Speaker 1: TV to maybe the first great discussion of the year.
Speaker 1: William Dudley is not the normal economist. Yes, his work
Speaker 1: at Goldman Sachs out of Berkeley, but far more his
Speaker 1: tenure at the New York Federal Reserve, and he has
Speaker 1: been very overt in writing not weekly but pretty much
Speaker 1: twice monthly for Bloomberg Opinion, and today he issues without
Speaker 1: question his most scathing essay on where our Central Bank is? Bill?
Speaker 1: What's it like to write with that language of a
Speaker 1: remarkable and surreal FED economics? Are you getting criticism from
Speaker 1: inside the Fed? I'm sure it doesn't make people they're happy,
Speaker 1: But the reality is I gotta call it like I
Speaker 1: see it, and what I see right now is a
Speaker 1: Federal Reserve that has a very benign forecast relative to
Speaker 1: what's actually happening on inflation. If you look at their
Speaker 1: forecast that they published at the December fone C meeting,
Speaker 1: they have inflation melting away to two point one percent
Speaker 1: in four even though they don't take monetary policy to
Speaker 1: a tight setting. The end of two thousand and twenty four,
Speaker 1: the Federal fundrais two point one percent below what they
Speaker 1: think is neutral. So how does the inflation magically disappear
Speaker 1: of the fedusors not? That's the question I want to
Speaker 1: raise in this piece, Bill Dudley. Alan Greenspan at least
Speaker 1: talking about the measurement and measured and the idea of
Speaker 1: a graduation a step by step approach. Alan Blinder, in
Speaker 1: an essay in two thousand five said, the Greenspan standard
Speaker 1: is suspect. Are we going back to Arthur Burns Burns
Speaker 1: in the pipe smoke, where we're gonna lose quarter point
Speaker 1: measured and start to see some real jumps. I think
Speaker 1: they're gonna go fairly slow at first, but because they
Speaker 1: think that the inflation pressures that we're seeing right now
Speaker 1: are going to subside as we go through the first
Speaker 1: half of the year. But the real new information is
Speaker 1: the tightness of the labor market and the fact that
Speaker 1: that tightness of the labor market is resulting in higher wages,
Speaker 1: wages above what's consistent with two percent inflation. So I
Speaker 1: think even if the initial impulsive inflation turns out to
Speaker 1: be transitory, they now have a problem because the labor
Speaker 1: markets sufficiently tight that wages are going to continue to accelerate.
Speaker 1: Bill In your piece, you reiterate your call for three
Speaker 1: to four percent as the potential and a rate for
Speaker 1: the Fed funds uh figure. I'm struck by the fact
Speaker 1: that you include the idea of an end rate for
Speaker 1: inflation at two and a half to three percent, which
Speaker 1: is actually a commonplace suggestion. What happens to risk markets
Speaker 1: if the Fed funds rate gets to three or four percent?
Speaker 1: Do you think that this economy can sustain that? Well?
Speaker 1: I think that's the fundamental question. Uh. In two thousand
Speaker 1: four two six, the economy is sustained the Fed taking
Speaker 1: the federal funds rate from one percent to five and
Speaker 1: a quarter. Yeah. In two thousands sixteen to nineteen, the
Speaker 1: economy didn't do so well with the Fed taking the
Speaker 1: federal funds rate to you know, he'll go a little
Speaker 1: bit over two percent. So I think that's the fundamental question.
Speaker 1: How does how do markets reactive Fed tightening? I think
Speaker 1: that right now, this idea though that the Fed is
Speaker 1: a small amount of tightening is going to cause markets
Speaker 1: to go down precipitously, and that's going to cause the
Speaker 1: FED to stop. I don't think that's the most likely outcome.
Speaker 1: If you think the inflation subsiding at two and a
Speaker 1: half to three percent would result in what could be
Speaker 1: a crippling FED funds rate, that are you saying that
Speaker 1: we need an inflation rate below two and a half
Speaker 1: percent to have an economy that is sustainable over the
Speaker 1: next decade. I don't think a three or four sent
Speaker 1: fiddle funds rate is crippling in any way. It's only
Speaker 1: unusually high relative to the last ten years. It's actually
Speaker 1: a pretty low relative to the last thirty or forty years.
Speaker 1: So I think the economic can do just fine with
Speaker 1: the federal funds rate in that range. I think when
Speaker 1: markets are really uh mis pricing is the fact that
Speaker 1: the FET is actually gonna have to move to take
Speaker 1: Madre policy setting. At some point the FED has turned
Speaker 1: more hawkish in the very near term, So a lot
Speaker 1: more hikes are being priced in in two thousand and
Speaker 1: twenty two. But the terminal fiddle funds rate the markets
Speaker 1: expecting it's still very low, only around two percent or so.
Speaker 1: But what's important here, and I think to summarize the message,
Speaker 1: you think for inflation to come lower, the feed needs
Speaker 1: to engineer trying to financial conditions. But I'm trying to
Speaker 1: want to stand from from your standpoint, where do you
Speaker 1: think that tightness begins? Where do you think it is
Speaker 1: one and a half, two, two and a half, What
Speaker 1: does it start to become restrictive? And where we can
Speaker 1: sit here and say the fet is now tightening. I
Speaker 1: think it's when the market start to price in more
Speaker 1: tightening than what they've breaks in at this point in time.
Speaker 1: I mean, it's the fact it's the fat just delivers
Speaker 1: what's priced in today. I don't think markets reacting very
Speaker 1: much because it's already priced in. So the feder reserve
Speaker 1: essentially has to go further than what the market anticipates.
Speaker 1: The markets to react. Uh, I think what will happen
Speaker 1: is the first boules will go out further. Uh, you know,
Speaker 1: we'll probably see boules in the two and a half
Speaker 1: three percent range. And as once we have higher tenure
Speaker 1: treasury no yields, that will start to weigh on the
Speaker 1: stock market a little bit more and other you know,
Speaker 1: you know, risk assets like say cryptocurrencies for example. But
Speaker 1: what you just said, though, the original piece of this
Speaker 1: is that you think when that happens, the ft doesn't
Speaker 1: back off. It's not the old playbook. Well, the ft
Speaker 1: has to do his job at the end of the day.
Speaker 1: I mean, if you if you try to defer the
Speaker 1: fight against inflation, all you do is get more inflation.
Speaker 1: So it's not like, you know, trying to be a
Speaker 1: nice guy gets you to a better price. We sort
Speaker 1: of saw that mistake in the early nineties seventies. So
Speaker 1: I think the Federals ave at the end of the day,
Speaker 1: will do his job. I think it's just slow. I
Speaker 1: think to realize right now the consequences of the tight
Speaker 1: labor market, which they've engineered at this point built totally.
Speaker 1: I want to go back to Dudley McKelvey, Goldman Sex.
Speaker 1: There's not a moment to lose. That's what I hear
Speaker 1: in your essay this morning. It's like, Okay, guys, let's
Speaker 1: get it going. The Taylor rule is described on the
Speaker 1: Bloomberg is stunning. It's something you and I never would
Speaker 1: have envisioned. John Taylor Stanford never would have envisioned where
Speaker 1: we are. Which moves quicker the Taylor rule coming down
Speaker 1: with all of us moving parts, or does the FED
Speaker 1: move up at a greater speed. Well, I don't think
Speaker 1: the Taylor rule is really that relevant to what the
Speaker 1: Fed is doing right now. I mean, if you listen
Speaker 1: to Cheer Polo, he talks about the importance of financial conditions,
Speaker 1: and I think that that's the key issue. The financial
Speaker 1: conditions today are extremely accommodative. To slow the economy down,
Speaker 1: the Fed needs to make financial conditions less accommodative. How
Speaker 1: do they do that? They raised short term rates. They
Speaker 1: raised short term rates more and faster than what markets expect. Bill,
Speaker 1: How does balance sheet reduction play into this as well?
Speaker 1: From your standpoint, Well, it's interesting that that there seems
Speaker 1: to be a growing sentiment that the balance sheet reduction
Speaker 1: is gonna happen sooner than last time, not just in time,
Speaker 1: but also in terms of the level of interest rates.
Speaker 1: Where the Fed is going to start the balance sheet
Speaker 1: normalization process very daily last week talked about getting going,
Speaker 1: you know, after a couple of rate hikes. I find
Speaker 1: that a little bit surprising given that the Fed. Fed
Speaker 1: officials have also said that they want the federal fund
Speaker 1: rate to be the primary tool of entary policy. Well,
Speaker 1: if you want the federal fund rate to be the
Speaker 1: primary tool of monetary policy, you need to get the
Speaker 1: federal fund rate up so it can actually react to
Speaker 1: adverse shocks in the economy, so you can push it
Speaker 1: back down. I think the case for being a little
Speaker 1: bit more patient with the balance SHE is still pretty strong.
Speaker 1: But it certainly looks like, judging from Fed officials commentary,
Speaker 1: that they're gonna go a little bit faster this time,
Speaker 1: not just in time, but also in terms of what
Speaker 1: level of interest rates we have to get to before
Speaker 1: they start to normalize the balance SHE. What's your sense
Speaker 1: of how much they should raise rates this year. I
Speaker 1: think they should go faster than what's priced into the market.
Speaker 1: I mean, obviously it's going to depend a bit on
Speaker 1: how the economy evolves, but my my best guess is
Speaker 1: that they need to do at least four or five
Speaker 1: rate hikes this year, and it wouldn't strike me at
Speaker 1: all if we if we get into an every meeting
Speaker 1: kind of cycle at some point. But what went wrong
Speaker 1: for this feder reserve. Let's finish that. What went wrong? Well,
Speaker 1: I think there are essentially four mistakes that were made.
Speaker 1: Number One, the way they operationalized the two percent average
Speaker 1: inflation targeting machine by saying that they're not going to
Speaker 1: even begin to lift off until they satisfied the goals
Speaker 1: of inflation at two percent, expected to be above two
Speaker 1: percent in the future, and at full employment. So that
Speaker 1: means the starting point for monetary policy lift off is
Speaker 1: economy is already overheating. Number Two, I think they were
Speaker 1: wrong about the labor market. I think they were surprised
Speaker 1: by how fast the labor market tightened. Participation rate has
Speaker 1: not come back to the to the degree that they
Speaker 1: were expecting. Third, they were surprised I think about inflation. Inflation,
Speaker 1: the transitory story hasn't played out very well. Uh it's
Speaker 1: I think a lot of the inflation pressures we're seeing
Speaker 1: our transitory, but that it's lasting longer, for a lot longer,
Speaker 1: at a lot higher rate than they anticipated. And then finally,
Speaker 1: I think they were a little bit too concerned about
Speaker 1: worrying about a papered Hendrew. So I think they were
Speaker 1: a little bit too gentle in terms of their communication
Speaker 1: to financial markets because they were worried that was going
Speaker 1: to provoke usself off in the bond market. And I
Speaker 1: think in the fact, the problem right now is that
Speaker 1: the markets aren't taking them seriously enough. Bill, just wonderful.
Speaker 1: You've been wanted about this for more than six months.
Speaker 1: Bill Duntly a Bloomberg opinion and of course the former
Speaker 1: president of the New York Fed. We need to kick
Speaker 1: things off in this equity market with Lori Canvassin of
Speaker 1: the head of US equity strategy at NBC Capital Markets. Laurie,
Speaker 1: you came into twenty two and said it would be
Speaker 1: a story of two halves. The first half of this
Speaker 1: equity market would look different to the second half. Laurie,
Speaker 1: start with what you expected and what you're seeing in
Speaker 1: the only part of twenty two. So look, well, great
Speaker 1: to be here as always, But look, I think last
Speaker 1: week we saw a lot of things we'd expecting to
Speaker 1: see unfold in the first half unfold with a certain
Speaker 1: ferocity that surprised even us. So we thought that the
Speaker 1: first half of the year was going to be the
Speaker 1: find by another big hurrah. We called it the last
Speaker 1: hurra on the value trade, so things like financials and
Speaker 1: energy fline. We certainly didn't expect to see energy of
Speaker 1: ten percent on a week, but we did think that
Speaker 1: we'd see this big move because you typically do see
Speaker 1: strong value leadership before first FED rate hikes and when
Speaker 1: the economy is running hot or above average. And what's
Speaker 1: interesting John to me is that with all these changes
Speaker 1: on rate hike use, we're still seeing an economics community
Speaker 1: that's looking for very, very strong growth this year. So
Speaker 1: that narrative is still intact. We think eventually this market
Speaker 1: will shift back towards growth. Um. But we've still got
Speaker 1: some woodchee chopped there. The valuations haven't corrected. There's still
Speaker 1: some time to that March lift off. If we end
Speaker 1: up getting it then um, and it'll be quite some
Speaker 1: time before markets start digesting a slow down in growth,
Speaker 1: which is what's penciled in as a risk for three.
Speaker 1: So I think we've still got to let this process
Speaker 1: play out. This is a repricing. It's painful. Um, it's
Speaker 1: got a little bit more ways to go. You're killing me.
Speaker 1: Lorio in the Tao is painful, Lorie, good morning. I
Speaker 1: want to talk about the most important research piece of
Speaker 1: the weekend, which was Bloomberg's Mark German's fabulous essay on
Speaker 1: Apple and would Apple go into fintech? And I want
Speaker 1: to use that as an overlay to year world, which
Speaker 1: is will corporations adapt given rising rates? And the answer is,
Speaker 1: you know what, corporations? Will corporations can adapt to this scenario?
Speaker 1: Is that true? I think that we have seen, going
Speaker 1: all the way back to when the China tariffs really
Speaker 1: came into view, there's always this fear in markets that
Speaker 1: whatever big issue comes out, that it's going to cause
Speaker 1: a growth stare that companies are going to be able
Speaker 1: to navigate. But time and time against whether it's the pandemic,
Speaker 1: whether it's supply chains, whether it's the tariffs, companies have
Speaker 1: been able to manage around, and you know, I think
Speaker 1: it's hard to bet against that adaptability of corporate America
Speaker 1: going forward, Lori. At the same time, you did say
Speaker 1: and a lot of people do expect some of the
Speaker 1: pain to continue. I'm wondering where, in particular, always really
Speaker 1: struck by Sundial Capital coming out and saying roughly four
Speaker 1: out of ten nast companies have seen their share price
Speaker 1: cut in half from their cut more than from the
Speaker 1: fifty two week highs. I mean there's been a complete
Speaker 1: recalibration of certain tech valuations. LOOKA, we updated all of
Speaker 1: our valuation models on Friday. I didn't quite catch Friday's closed,
Speaker 1: but I did catch Thursday's close. And whether you're looking
Speaker 1: growth versus value tech relative to the broader market, we
Speaker 1: still have big valuations on that side of the market.
Speaker 1: I do expect we'll be able to buy those those
Speaker 1: areas back before the year is up, but we're simply
Speaker 1: not there yet. And frankly, Lisa, I was surprised that
Speaker 1: we didn't see more improvement on my tech valuation model.
Speaker 1: It's not as expense, it's not the most expensive sector
Speaker 1: in the market industrials is, but it's still ranking second.
Speaker 1: It's still ranking pretty extremes. So that's really telling me
Speaker 1: this free pricing still has a lot of room to go, Laurie,
Speaker 1: when you're thinking about FED right high, So let's finish
Speaker 1: finish here. What's the difference between help us distinguished between
Speaker 1: a rotation and broad based de risking that we could
Speaker 1: see off the back of the FED coals light to
Speaker 1: this year. So what here's the thing is that people
Speaker 1: don't want to sell out of their equities if we're
Speaker 1: not on the precipice of a growth scare or a recession.
Speaker 1: And that's the real difference here. Um. If you go
Speaker 1: back to when quantitative tightening was spooking markets, it was
Speaker 1: also against the backdrop of the trade war which was
Speaker 1: just getting started, and there were real recession fears that
Speaker 1: were starting to build. We are hopefully at the tail
Speaker 1: end of this pandemic, in recovery mode with a hot
Speaker 1: economy that no one's really arguing against for the moment.
Speaker 1: If you see that hot economy start to be questioned,
Speaker 1: that's when markets are really going to have a problem
Speaker 1: and you're going to run the risk of really seeing
Speaker 1: the substantial decline. But we're not there yet. Fantastic work.
Speaker 1: Laurie as always going to hear from the Lori Canvassin
Speaker 1: and that of obviously Capital Markets a Tommy conversation and
Speaker 1: one of those companies that needs to adapt to the
Speaker 1: world around us, it's FISA and output Bola, the chairman
Speaker 1: and CEO of FISER on place to say join us. Now,
Speaker 1: don't de fantastic to catch up with you, sir. A
Speaker 1: series of announcements from your company led by the four
Speaker 1: year research collaboration with Being Therapeutics, expanding m R and
Speaker 1: a effort here it's pretty clear to see. I want
Speaker 1: to understand though. My first thing to think seeing the
Speaker 1: news why the partnerships instead of straight acquisitions. I think
Speaker 1: sometimes being a good partner provides better results than if
Speaker 1: you own a company. And right now we want to
Speaker 1: place multiple bets and collaborations, and we have proven that
Speaker 1: this works very well with buy on day. So I
Speaker 1: don't say that we would then you would not see
Speaker 1: also acquisitions from our side in this front, but right now,
Speaker 1: in these specific areas, we felt that partnerships will give
Speaker 1: us exactly what we want without dedicating amounts of capital
Speaker 1: that would be needed if we wanted to require the companies. Well,
Speaker 1: that's what I wanted to ask, That's what I wanted
Speaker 1: to go to next. What does that mean for capital
Speaker 1: annocation elsewhere? What kind of doors does it open up
Speaker 1: if the strategy elsewhere as a series of bets and
Speaker 1: a series of partnerships. Clear early this is one of
Speaker 1: the top priorities that the visor and myself personally are
Speaker 1: having for for this year. I wouldn't say is the
Speaker 1: number one because the number one it is to stay
Speaker 1: ahead of the virus, to stay ahead of COVID. This
Speaker 1: is what the company needs to do because this is
Speaker 1: what the world needs. But clearly number two priority it
Speaker 1: is to invest a lot of capital that it is
Speaker 1: accumulated either through the normal course of business or through COVID,
Speaker 1: and that needs to be an investment on science. We
Speaker 1: believe that we have the machine right now, the developed
Speaker 1: clinical development machine, the manufacturing machine, the commercial machines, all
Speaker 1: these platforms are waiting for a new science, highly break
Speaker 1: through science to come in and produce allusions for for
Speaker 1: for humankind, and this is where the capital will go. Well,
Speaker 1: let's talk about the platform getting the most attention right now,
Speaker 1: m A and I. It's been met with hope, confusion,
Speaker 1: and to some degree skepticism. Dr. I'm trying to understand
Speaker 1: from from your standpoint, communicate to people the hope around
Speaker 1: this when we keep getting told we need another shot.
Speaker 1: If it's so good, why do you need a second,
Speaker 1: a third, and a fourth. Yes. First of all, let
Speaker 1: me say what I think about MMR and EMER and
Speaker 1: it is not the holy Grail. But it is a
Speaker 1: very very powerful technology. It is a very powerful technology
Speaker 1: that has produced dramatic results, positive impact, and we are
Speaker 1: only scratching the surface. So our strategy and our vision
Speaker 1: it is to harness the power of this technology to
Speaker 1: multiple other areas. The first area that is the self
Speaker 1: evidence and the lowest hanging fruit. It is other vaccines
Speaker 1: for other infectious disease and this is something that we
Speaker 1: are doing mainly in partnership with BioNTech. We just expanded
Speaker 1: with a third target. You said, why if it is
Speaker 1: not good, it's not producing longer lasting results. It's not
Speaker 1: something that's related with MMR and A is something related
Speaker 1: with the virus. As you most probably know or if
Speaker 1: you ask experts, the natural infection with this virus also
Speaker 1: doesn't produce big immunity. In fact, the natural infection in
Speaker 1: many times it produces half the time that you can
Speaker 1: get in terms of how long you're protected then the vaccines.
Speaker 1: So it's not right to say that the mRNA doesn't
Speaker 1: create durable protection. It is this virus that is very
Speaker 1: difficult to tackle and it takes constantly. That's why we're
Speaker 1: happy that we have mRNA. But it's not the only
Speaker 1: area that mRNA can help cancer. It is another area
Speaker 1: and we're having significant efforts right now in the world
Speaker 1: and internally. And another area that we announced today partnership
Speaker 1: would be are there are diseases. These are diseases mainly
Speaker 1: that uh they have as a cause a mistake in
Speaker 1: your DNA and genetic mistakes. Something is wrong with your
Speaker 1: DNA and there's a result you have a disease. What
Speaker 1: we try to do with the base in editing technology,
Speaker 1: which being is a master it is to targets that
Speaker 1: will be delivered through a marina that will be able
Speaker 1: to correct this mistake. There are several the in editing technologies.
Speaker 1: We did a lot of new diligence and we thought
Speaker 1: that the base is how scope technology base is the best.
Speaker 1: And also did a lot of new diligence about companies
Speaker 1: and the best one was BIM and this is why
Speaker 1: we did this partnership. We're having some other deals that
Speaker 1: we're announced today that will help us to improve one
Speaker 1: further the ACUITOUS, which is given us license for ten
Speaker 1: different targets in the l m P target ellen P.
Speaker 1: It is the lipid nonparticles that are used to transfer
Speaker 1: the RNA. And the last, but not least, it is
Speaker 1: the Contex what Condex technology is all about. They are
Speaker 1: uh creating DNA instead of biological manufacturing, which means that
Speaker 1: you have virus to make it. It's just in happy
Speaker 1: bottom line. What does this mean? Instead of having a
Speaker 1: process that takes a very important process for the production
Speaker 1: of our amor and a vaccine, instead of one month,
Speaker 1: you can take it down to a couple of days.
Speaker 1: This is very very important because imagine, for example, you
Speaker 1: can have a new variant right now, if we were
Speaker 1: successful theoretically, instead of creating a new variant vaccine in
Speaker 1: ninety days one d days to do it in two
Speaker 1: months rather than three months. Instead of being able to
Speaker 1: create a flu vaccine that you are six months or
Speaker 1: five months ahead of the target, now you're three or
Speaker 1: four months before the season and you have better months.
Speaker 1: Very important technology that will allow us to solidify our
Speaker 1: leadership in this area and more important, to deliver to
Speaker 1: the world what they're expecting from us, better health care
Speaker 1: solutions based on this technology. To you run it down o'clock.
Speaker 1: So I've got a champion. I apologize this from not Djokovic.
Speaker 1: In the last couple of moments a story. I'm sure
Speaker 1: that you've been following. I'm pleased and grateful that the
Speaker 1: judge I of have a term my visa cancelation. Despite
Speaker 1: all that has happened, I want to stay and try
Speaker 1: to compete in the Australian open As you know, doctor,
Speaker 1: he got that exemption by having a previous infection. You
Speaker 1: said something quite important. I want to want to stand
Speaker 1: from your standpoint whether a previous infection provides similar protection
Speaker 1: equivalent to a vaccine. First of all, I'm a fan
Speaker 1: of Djokovitch, but I can't even go to this dispute
Speaker 1: if he has the documentation or not. This is something
Speaker 1: between him and the authorities and their doctor, so that's it.
Speaker 1: I think previous infections, they are in general, not in
Speaker 1: this case. In general, they are protecting against the infections
Speaker 1: for a period of time, the same like vaccines. The
Speaker 1: comment that I made was that, for example, in a
Speaker 1: lot of European countries, the validity of the certificate of
Speaker 1: vaccination in six months after your last dogs for naturally infection,
Speaker 1: it's go to three months or four because they know
Speaker 1: that the protection of you are getting after an infection
Speaker 1: doesn't last as much as the vaccine. This is what
Speaker 1: they said. Can you talk to me about margins on
Speaker 1: the vaccine as compared to say, the oral pill paxslovid.
Speaker 1: What's the difference that doctor? Right now? Look, the difference
Speaker 1: is big because rest of all, in in the backs gloved,
Speaker 1: we are under person all the process and we don't
Speaker 1: have any royalties of size or size of a royalties
Speaker 1: to provide to any people. So we are having under
Speaker 1: of their chronomals and the production margins are are bigger
Speaker 1: in pills rather than the in this vaccine. Find a
Speaker 1: question from me, and it's a sensitive one. You've set
Speaker 1: up a strong stream of recovering revenue now with this
Speaker 1: vaccine rollout, you're being insulated by government policy the world over.
Speaker 1: Do you worry sometimes dr about the pr fallout from that?
Speaker 1: The backlash that you could get making money off a
Speaker 1: vaccine has now been mandated in many many places, being insulated,
Speaker 1: having that revenue stream largely insulated by governors around the world,
Speaker 1: do you worry about the fallout from that? Although I'm
Speaker 1: not sure to understand the world insulated, but I think
Speaker 1: I understand the meaning of your I mean, what you
Speaker 1: the meaning of the insulated but I understand I think
Speaker 1: the overall concept no, I feel very very very good.
Speaker 1: If you have to believe that it is appropriate for
Speaker 1: private sector to be entrepreneurs and produce, let's say, product
Speaker 1: medicine that they can get some profit out. I couldn't
Speaker 1: think of a company that would deserve more to make
Speaker 1: money other than a company that did so good to
Speaker 1: hu money. I'm very proud and for what we have done,
Speaker 1: and I'm very very enthusiastic that this example will create
Speaker 1: way more risk taking in this industry, the health care
Speaker 1: industry that will result in way more breakthrough the products
Speaker 1: that will save way more like doctor a ton of
Speaker 1: issues that you and I need to cover in the future.
Speaker 1: We appreciate your time this morning, though, thank you very much,
Speaker 1: Sir Ababuild that the Fighter CEO, the move we saw
Speaker 1: in crude last year, it's part of the inflation story,
Speaker 1: not all of it, but part of it, particularly the
Speaker 1: energy story in Europe, and that's complicating matters for central
Speaker 1: banks and policy make is the world over. It's complicating it,
Speaker 1: but it takes complicated analysis, and someone that can do
Speaker 1: that is Francisco Blanche, Global Commodities Head of Bank of
Speaker 1: America We're gonna focus here on what you want to know,
Speaker 1: which is the price of a barrel of oil. But
Speaker 1: Francisco Blanche takes it down to the micro theory of
Speaker 1: companies minds production worldwide. Francisco, let me start there and
Speaker 1: save the glory for Lisa and John. On a hundred
Speaker 1: and twenty dollar Brent crude, what do smelters do it?
Speaker 1: Aluminum plants? Given the Francisco Blanche call, what is an
Speaker 1: aluminum producers supposed to do? He tol thanks for having me. Uh,
Speaker 1: I'm hoping producer is supposed to be pretty in China
Speaker 1: pairing back supplies. And what we are saying now and
Speaker 1: we've seen now for some time, is the fact that
Speaker 1: the Chinese government is very focused on curtailing the energy
Speaker 1: intensity of its exports. Remember that for the longest time
Speaker 1: we've all lived with over twenty five years a show
Speaker 1: we've lived within clearly cheap Chinese exports, which were driven
Speaker 1: by cheap labor, cheap capital. But also many people forget
Speaker 1: about this point cheap energy. And uh, I think I
Speaker 1: think the Chinese government is increasingly uh focused on climate
Speaker 1: change uh and and and also focused on turning around
Speaker 1: its energy economy, which in turn, of course, as you
Speaker 1: just pointed out, it's it's impacting the price of aluminum
Speaker 1: quite severely. And you know, we're bullish aluminium this year.
Speaker 1: We think it's going to continue to go up and
Speaker 1: part of part of it, large largely is driven by
Speaker 1: the energy. Increased energy costs, so as a smelter pretticularly
Speaker 1: here in China, you're supposed to pay back your production,
Speaker 1: but the same thing goes for Europe and ultimately um,
Speaker 1: aluminum and many other energy intensive commodities are heading towards
Speaker 1: North America, which is the world's energy haven from a
Speaker 1: cost standpoint. Francisco, you came out with a pretty stunning
Speaker 1: call earlier last year about dred and twenty barrels for crewe,
Speaker 1: the potential for that increase, and we've seen at that
Speaker 1: time oil prices were climbing very significantly. Since then, people
Speaker 1: have cooled it a little bit. Do you still think
Speaker 1: that that is the pace of travel, that's the end
Speaker 1: point here? Based on the increased production from OPEC plus
Speaker 1: and based on the fact that we do have this
Speaker 1: omicron kink that is reducing demand at least temporarily well so,
Speaker 1: so amicron is is definitely impacting demand in the first quarter,
Speaker 1: but we've seen cases speaking South African and rolled down
Speaker 1: pretty meaningfully. UM. I think a lot of medical experts,
Speaker 1: a lot of UH people on the field are calling
Speaker 1: for a peak in omicron cases in Europe and the
Speaker 1: US within the next within the next month. UM. Big
Speaker 1: question mark in terms of our call is what happens
Speaker 1: in China and whether the Chinese government can maintain the
Speaker 1: zero COVID tolerance policy, which is of course leading to
Speaker 1: lockdowns in different cities with something as contagious as omicron.
Speaker 1: So that's I think the biggest question mark around our call.
Speaker 1: But we still think triple digit oil is within the works.
Speaker 1: Heading into a second quarter, we see demand recovering quite meaningfully.
Speaker 1: And one one thing we've been noting for a while
Speaker 1: is that opex supply OPEC plus supply, it's likely going
Speaker 1: to start leveling off in the next two months. Remember,
Speaker 1: a lot of Russian companies have not been able to
Speaker 1: meet their export quotas, and UH ross Nift has been
Speaker 1: kind of left as as the main supplier of incremental barrels.
Speaker 1: Even then, we think Russia's incremental supply will level off
Speaker 1: naturally within a month or so, and then it's really
Speaker 1: just down to Saudi Arabia and Emirates to produce incremental
Speaker 1: barrels for the world markets. Fits it's going to be
Speaker 1: a tight demand recovers here, Francisco. There's so much in
Speaker 1: there that I want to impact, but I want to
Speaker 1: start with the China and the zero COVID policy. Can
Speaker 1: you give us a sense of the bifurcated outcomes to
Speaker 1: your call, depending on whether they try to stick with
Speaker 1: it or whether they give it up and try to
Speaker 1: adapt to a more open type of policy. Right, Well again,
Speaker 1: I mean, I think I think the big question mark
Speaker 1: here for for everybody is what happens in the Winter Olympics. Um.
Speaker 1: We are a month away, and many people may included
Speaker 1: which are not necessarily experts, really question how you can
Speaker 1: run a zero COVID tolerance UM policy under this influx
Speaker 1: of athletes from all around the world and diplomats and
Speaker 1: and and kind of everything that the Olympics brings with it. Um. So,
Speaker 1: So I think assuming that, you know, assuming that there
Speaker 1: is there is some relaxation of the policy, UM, we'll
Speaker 1: see continued growth in demand. But remember China's fifteen and
Speaker 1: a half million barrels a day in a hundred million
Speaker 1: barrel day market. UH is the second largest consumer in
Speaker 1: the world. It's the number one oil importer in the world.
Speaker 1: So obviously a strict lockdown in China broad based, will
Speaker 1: lead to meaningful demand laws. So so we're keeping a
Speaker 1: close eye UM and UH and and and that's the
Speaker 1: main risk to our view. At this point, we think Iran,
Speaker 1: which is the supply risk, is less of a challenge
Speaker 1: given UH seems like a resolution to we run a
Speaker 1: new e standoff is looking less likely by by the day.
Speaker 1: But those are two main downstair risks to our view. Francisco,
Speaker 1: forget about all the Wall Street chit chat. What does
Speaker 1: triple digit oil, triple digital aluminum, triple digit live cattle,
Speaker 1: What does all that mean to us out in the
Speaker 1: real world. How's our world gonna change with the Francisco
Speaker 1: blanche of barrel oil? Well, what's going to change? And
Speaker 1: you guys have talked about it in the prior segment.
Speaker 1: Is going to force the Fed to tighten policy a
Speaker 1: little faster than the markets anticipating I think four hikes
Speaker 1: this year. It's pretty much baked then. Um, so we're
Speaker 1: gonna see that I'm a little more worried about the
Speaker 1: balance sheet runoff UM, partly because what we saw back
Speaker 1: in In fact, back in the day, we wrote extensively
Speaker 1: about this in our process at publications, and we looked
Speaker 1: at the impact of that on pieces entitled one of
Speaker 1: them entitled Mind the Unwind. And I do, I do
Speaker 1: believe that that the fat bounce sheet has a huge
Speaker 1: impact on on just generally asset values. Maybe let's sew
Speaker 1: in commodity values. But we're still saw a big sell
Speaker 1: off in commodity prices as the FED started compress its
Speaker 1: bouncy in the second half of twenty eighteen. So so
Speaker 1: I think I think that's that's what it means. It
Speaker 1: means the Fed's going to be um having to to
Speaker 1: press all harder on the brakes. And uh, and of
Speaker 1: course we know that the big forces of demographics and
Speaker 1: technology could come into play in a minute. So so
Speaker 1: it's it's a difficult job for the FED to to
Speaker 1: slow the economy to bring inflation back down to two. Um,
Speaker 1: they could overdo it. And and uh, that's I think
Speaker 1: the big risk we're looking at into into the second
Speaker 1: half of twenty two And and and I guess first
Speaker 1: half of twenty three. That's what everyone's got in mind
Speaker 1: here as as we go over the next six months, Francisco,
Speaker 1: can you give us a sense of the pace of
Speaker 1: that increase to triple digit oil and what the trigger
Speaker 1: could be? Right, So, the trigger is going to be
Speaker 1: primarily a competition between gasoline and middle de slids things
Speaker 1: like diesel and jeffuel that refineries need to produce so generally,
Speaker 1: and you have two big forces in the oil market,
Speaker 1: the driving and trucking and flying coming together and clashing
Speaker 1: right with this backdrop of incredibly high global gas prices
Speaker 1: um creating substitution into oil. That could I think be
Speaker 1: the trigger from a demand standpoint. Refiner is really trying
Speaker 1: to catch up and produce both both products. And remember
Speaker 1: the incremental barrels that Saudi Arabia can bring into the
Speaker 1: market are going to be heavy and sour. And I'm
Speaker 1: going to do technical here, but heavier and sour barrels
Speaker 1: are harder to refine, So I fires are gonna have
Speaker 1: to work twice as hard to bring the gasoline and
Speaker 1: the jet diesel the market once. But at the same
Speaker 1: time they're gonna have to do that with incrementally heavier
Speaker 1: barrels that are harder to refine, and and that's a
Speaker 1: little bit what we saw back into plasser and eight.
Speaker 1: And that's one of the reasons we remained quite bullish
Speaker 1: on on oil heading into into the summer months here.
Speaker 1: Plus there is a big pent up demand story. I
Speaker 1: think we all want to travel and move around and
Speaker 1: and see friends and family and visit places. So so
Speaker 1: the pent up recovering services, I think it's going to
Speaker 1: be quite spectacular once once the the omicron wave faiths
Speaker 1: and and and of course, assuming there's no third or
Speaker 1: fourth or fifth transformation of of of the virus here. Francisco,
Speaker 1: just quickly you mentioned the back end of I think
Speaker 1: a lot of people would have sat up when they
Speaker 1: heard that, because we went from seventy three down to
Speaker 1: forty five and q fouren it was a big, big
Speaker 1: down draft. It feels different this time when I look
Speaker 1: at the screens every day. Yields her up and equities
Speaker 1: to suffering crews pretty good. It's resilient. Can you walk
Speaker 1: me through the different dynamic now compared to say, back
Speaker 1: in the back end of right, So, so I think
Speaker 1: I think it's different. Uh, interest rate hikes are different
Speaker 1: than than bannanship compression. UH interest rate hikes do not
Speaker 1: tend to slow commodities down in the early stages, and
Speaker 1: we've seen that repeatedly. Commodities are late cycled performers. Inventories
Speaker 1: right now are very very low for crude oil and
Speaker 1: for many other UH raw materials. So what tends to
Speaker 1: have in UH in in FED tightening cycles is the
Speaker 1: first few sites, the first few hikes are are less impactful,
Speaker 1: and then as you get towards the end of the
Speaker 1: of the hiking cycle, that's when things tend to roll off.
Speaker 1: And that's what we saw the last time as well, Right,
Speaker 1: So the second half of eighteen was going to at
Speaker 1: the end of the FED tightening cycle, if you like,
Speaker 1: UM and UM and and and that's why we expect
Speaker 1: this time around, except for the FED seems to be
Speaker 1: UM trying to accelerate everything a little more than they
Speaker 1: did back then. Back then they were very very very
Speaker 1: gently hiking rates. Now things could could happen a lot quicker.
Speaker 1: So so we do expect a lot of alativity in
Speaker 1: two and I think that's true for all markets, not
Speaker 1: just commodities, and things true for equities. UH it's true.
Speaker 1: For for fixed income assets, We're gonna see a fair
Speaker 1: amount of vall uh. And you know I say that
Speaker 1: as part of my role in in the real business,
Speaker 1: but research business. So we do think alativity is gonna
Speaker 1: be extremely high this year compared to other years. Thank
Speaker 1: you as always, Francisco Blanched the Bank for America. It
Speaker 1: is a time of resolutions. It is January, and you
Speaker 1: need to do something now, so just possibly you'll be
Speaker 1: smarter twelve months from now. What's interesting is the shortest
Speaker 1: answer that I know, and I've trumpeted this for years,
Speaker 1: is a physical subscription to Foreign Affairs Magazine on radio.
Speaker 1: It's simple. You throw it on your table, you read
Speaker 1: one or two articles every month, and you are way
Speaker 1: better off. This month is no different. The Digital Disorder.
Speaker 1: A tour divorce to Force, including Joseph Nye, Valley Nasser,
Speaker 1: and Elizabeth Economy. Dan Kurtz Failan joins us right now,
Speaker 1: editor of Foreign Affairs Magazine. I went right to the
Speaker 1: Elizabeth Economy article. Dan. She did some great work with
Speaker 1: us with Ian Bremer. A few weeks ago. She passes
Speaker 1: China in America and says, maybe China is looking at
Speaker 1: the battle and they may win the battle, but will
Speaker 1: they win the our peace set out first? Now the
Speaker 1: battle in the war in Beijing. So right, So, Thomas,
Speaker 1: you know, Liz was really one of the first people
Speaker 1: to remind all of us and to really point out
Speaker 1: just how ambitious Chi Jimping was when it came to
Speaker 1: is what he wanted to do within China, what he
Speaker 1: wanted to do with what do you want to do globally?
Speaker 1: So Liz was really on the ambition of Chi Jimping,
Speaker 1: the extent to which he really represented a change in
Speaker 1: Chinese leadership, and what she sees now is just the
Speaker 1: truly global extent of what he's trying to do. When
Speaker 1: you see it in in Belton Road, you see it
Speaker 1: in China's ambitions in in its own region, in Taiwan
Speaker 1: and the South China, see some of the crisis we
Speaker 1: can see coming this year, you see it, and it's
Speaker 1: economic role globally, and and what Liz really traces out
Speaker 1: in this piece is the tension between Chi Jimping's leadership
Speaker 1: style and the extent of those ambitions. So you see,
Speaker 1: you know, we also had a lot of time reacting
Speaker 1: to some of the you know, gigantic top line investment
Speaker 1: numbers to some of the ambitions, but Chi jimping as
Speaker 1: we're starting to see also a lot of real challenges,
Speaker 1: and he may be his own worst enemy when it
Speaker 1: comes to some of this. And one of the really
Speaker 1: worrying things I think at this particular moment, especially as
Speaker 1: you have huge imping Ivan not left China in a
Speaker 1: couple of years, it's unclear what kind of information he's getting,
Speaker 1: what kind of feedback epe. So you see this gap
Speaker 1: between ambition and ability to deliver that could manifest in
Speaker 1: slightly worrying ways and the months ahead. You're an expert
Speaker 1: at dancers failing on another time and place of China's
Speaker 1: fractious relationship with America, and that's George Marshall after World
Speaker 1: War Two? Who's Joe Biden's George Marshall. You know, there's
Speaker 1: that scene where Marshall retires and FDR calls him up
Speaker 1: like forty six hours later and says, unretired, Now you're
Speaker 1: going to China. Who is the George Marshall for the
Speaker 1: president to get this done? I think what what you
Speaker 1: see that is similar between that time and now is
Speaker 1: really this fight within the administration to define the basic
Speaker 1: objectives what we're trying to do with our China policy.
Speaker 1: So in the nineteen forties, it was a question of
Speaker 1: what you do to try to stop now from coming
Speaker 1: to power soft into a Chinese victory, which is something
Speaker 1: is uh, we we all know now we failed to do.
Speaker 1: And there's a similar fight today among different parts of
Speaker 1: the administration, different parts of the government to decide just
Speaker 1: how tough we need to be in to what extent
Speaker 1: we can be conciliatory. So you have you know, someone
Speaker 1: like John Carey trying to find ways to work with
Speaker 1: China on climate change, and you have others with the
Speaker 1: administration at the Pentagon, Kirk Campbell at the White House.
Speaker 1: I think you're trying to craft a tougher line and
Speaker 1: it's really this uh process of working out how these
Speaker 1: different forces fit together within the administration. So you can
Speaker 1: see some slightly incoherent elements to this over the course
Speaker 1: of this year. And I think the challenge for the
Speaker 1: administration going through this year is trying to really craft
Speaker 1: that into a strategy that reflects those various considerations and pressures.
Speaker 1: And the President himself is behind There's so many incredibly
Speaker 1: important topics. I do want to stay on China. But
Speaker 1: I do also want to address another essay that I
Speaker 1: thought was fascinating about the rocky transition to green entered
Speaker 1: g especially in light of what we've seen in the
Speaker 1: price of oil, the surprise rise because of a lack
Speaker 1: of supply, a lack of investment in production. How does
Speaker 1: the global revolution and green energy rejigger the global powers.
Speaker 1: So so this is a great piece called Green Up
Speaker 1: People by Megano Solomon and Jason board Off. And what
Speaker 1: we what really comes through, and this is that even
Speaker 1: as we start to think about new energy sources and
Speaker 1: look towards a different energy future, the geopolitics don't go away.
Speaker 1: And that's true both in the in the medium term
Speaker 1: and also in the long term when you do see
Speaker 1: a truly grand transition. So in the short term, uh,
Speaker 1: there's no better example of this than what's happening now
Speaker 1: with Russia and Ukraine and Europe, where in the short
Speaker 1: term Russia has more influence from its energy resources and
Speaker 1: that's a big tool that it brings to the Ukraine crisis.
Speaker 1: And then in the long run, when you look at
Speaker 1: things like rare earth materials and the kinds of inputs
Speaker 1: to all the parts of the green supply chain. All
Speaker 1: of that's going to become geopolitically complicated, just in the
Speaker 1: way that oil has been traditionally. So even as you
Speaker 1: consider a very different energy future, a lot of the
Speaker 1: dynamics and risks that are very familiar to us from
Speaker 1: past decades are not going to go away, and in fact,
Speaker 1: in the short term they may go up. Especially policy
Speaker 1: makers don't really appreciate those risks in the near term.
Speaker 1: I was just thinking also about Kauza, Khistan for example,
Speaker 1: and the uranium output that they're basically the Saudi Arabia
Speaker 1: of uranium, and people are suddenly aware of this because
Speaker 1: of its input to nuclear energy. Who are going to
Speaker 1: be the powers of the green future that you foresee,
Speaker 1: even with some of the rockiness along the way. So
Speaker 1: this to to go back to China. You know, China
Speaker 1: has been very very deliberate, as you all know, in
Speaker 1: building up its power here and I think before most
Speaker 1: other governments were really thinking in these terms. China saw
Speaker 1: that by becoming the green energy superpower, it's obviously still
Speaker 1: using a lot of coal and using plenty of a
Speaker 1: dirty energy, but it really set about trying to dominate
Speaker 1: a supply chain to dominate a lot of these industries,
Speaker 1: a stuff that I these industries really heavily. But you
Speaker 1: also have a lot of much more kind of complicated
Speaker 1: geo political spaces where mining is really is really prevalence.
Speaker 1: So you have the d r C, the Congo where
Speaker 1: they're they're important minds. You have places like Chile and Bolivia.
Speaker 1: All of these bring their own foreign policy questions. So
Speaker 1: there was obviously a time when we would have worried about,
Speaker 1: uh securing oil supplies in the Middle East, But now
Speaker 1: it's gonna be this major foreign policy consideration thinking about
Speaker 1: those uh, those materials that are in again some some
Speaker 1: complicated countries that are going to bring political challenges with
Speaker 1: their own Dan thank you Danks failing that of foreign Affairs,
Speaker 1: tell him what a staff for geopolitics and twenty two.
Speaker 1: This is the Bloomberg Surveillance Podcast. Thanks for listening. Join
Speaker 1: us live weekdays from seven to ten am Eastern I'm
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